Pender's Blog

Microsoft Gets Specific on S+S Offerings

The haze has lifted, mostly. Not the haze that perennially envelops steamy
Houston during the summer, but the haze that has hung over Microsoft's Software
Plus Services strategy and the question of exactly how S+S will affect partners.
And the news isn't necessarily good.

Ravi
Agarwal

We say "mostly" because indications are that even Microsoft folks aren't totally
sure what's going on with the company's S+S partner strategy: "No one really
seems to really have the big picture," Ravi Agarwal, senior executive officer
of groupSPARK, told RCPU today at the Microsoft Worldwide Partner conference
in Houston. "A lot of people within Microsoft don't have all the details yet.
This whole program got rushed through in 18 months. Normally, it takes about
three years to put together a product."

What we already knew was that Microsoft, with its plans to host its own applications,
was setting itself up to compete with members of its own channel. What we know
now is more specific information about how those plans will work. This morning,
at the WPC, Microsoft Business Division President Stephen Elop (the
new Jeff Raikes, if you're keeping score), announced some of the details
of Microsoft's hosting offering.

RCPU got into specifics on Monday with Marie Huwe, general manager of partner
strategy and programs at Microsoft. Here's what she told us, and what Elop announced
this morning: Microsoft has created a couple of new offerings, including one
for "deskless" workers, or those folks who don't use a computer very
much but still need to get to applications now and then. The Deskless Worker
Suite, which will include hosted versions of Exchange and SharePoint, will be
available for $3 a month.

The other offering is the Microsoft Business Productivity Online Suite, which
consists of hosted Exchange, SharePoint, Office Communications (for functions
such as instant messaging) and Live Meeting. That suite will be available for
$15 per month. At the time of this writing, Microsoft hadn't provided any dates
of availability -- but Agarwal indicated that an October launch was on the cards.

There will also be some tools to help partners prepare for SaaS, including
a Web site that Microsoft has developed with analyst mega-firm IDC intended
to give partners of all stripes direction on how they might profit from a hosted
model. All the relevant information will be on http://partner.microsoft.com
as the week goes by.

"You answer some questions about who you are and what your business is,"
Huwe said of the new Web resource. "Then you talk about what opportunity
you want to take advantage of and it gives you some guidance. You almost write
up your own pro forma about how you want to move. The whole idea is that it's
interactive, specific guidance for you."

So, there you go. That's what we know. What we don't know -- and this is the
leftover haze we mentioned in the opening paragraph -- is specifics about feature
sets, Agarwal mentioned. But we do know more about how partners will participate.
And that's where things get sticky.

For starters, Agarwal said (although Huwe didn't mention this specifically),
Microsoft won't sign customers directly -- as it does, for instance, for Dynamics
CRM Online -- so customers will need to at least have a "reference partner."
That partner, in turn, will get 12 percent of the subscription fee for the first
year of the contract and 6 percent every year thereafter. Other than that, though,
it's all Microsoft, Agarwal told us -- Microsoft bills customers, upsells other
services and sets prices.

And partners get squeezed out. They won't be able to bundle applications they
way they do now, and they'll no longer "own the customer" and be able
to profit from lucrative upselling opportunities. They'll get their money --
and Microsoft will get their customers. It's Microsoft's first small step toward
direct sales, and partners are not happy about it.

"It's a crack in the door, and [partners] are not sure what else Microsoft
will do with that crack, what else MS will sell that will replace that VAR over
time," Agarwal said. He's got worries of his own -- his company provides
private-label hosting to partners, and he's about to be in direct competition
with Microsoft.

Agarwal touts his company's flexibility; the resellers who use groupSPARK for
hosting -- most of the time, those resellers' customers have never heard of
groupSPARK -- will be able to bundle applications and upsell in a way that partners
that work with Microsoft won't be able to do. Plus, Microsoft's offering won't
support some older versions of Outlook, nor will it offer Linux or Mac support.

Beyond groupSPARK, though, partners should be worried, Agarwal said. Microsoft's
quickly developed strategy -- Agarwal calls it a "knee-jerk reaction"
to competition from Google and an increasing group of companies hosting Exchange
-- will wrestle control of customers away from partners and into the hands of
Microsoft, he said.

And that has a lot of ramifications. For instance, partners sometimes charge
customers different fees based on certain factors; financial-services firms
or larger companies, for instance, might pay more than other customers, Agarwal
said. But Microsoft's pricing scheme will make it more difficult for partners
to vary pricing, and, beyond that, partners will have to compete with aggressive
Microsoft pricing for hosted applications.

The whole thing, Agarwal said, will start to feel to partners like a betrayal
-- Microsoft, after all, built its business on the channel, and now it's apparently
trying to take some of that business away: "Certain partners will feel
betrayed," Agarwal said. "As details unfold, they will feel betrayed.
Over the next few years, these VARs will start feeling it."

The concerns Agarwal expressed aren't the rantings of some disgruntled partner.
His company was just named the 2008 Microsoft Partner of the Year for Advanced
Infrastructure Solutions, Hosting Solutions.

Agarwal sees several positives in the new structure. He estimates that somewhere
in the neighborhood of 3 percent of the market for hosted e-mail and office
productivity applications is currently being reached. Having Microsoft's "air
cover" of broad-market advertising will be a boost to the market. And the
low-end solutions can give VARs an opportunity to make a sale at small companies
that don't have the budget for an on-premise implementation of Exchange or SharePoint.
The moves will require adjustments in VAR business models, Agarwal said.

Analyst Paul DeGroot with Directions on Microsoft agreed that VARs will need
to change their business model over the next couple of years to adapt to Microsoft's
moves and to the market, but he contended that Microsoft really has no choice
but to act unless they want to watch the industry walk away from them. "They
run the risk of being locked in a desktop ghetto," DeGroot said. Meanwhile,
he's glad to see Microsoft put its cards on the table for the channel. "It's
good to see the compensation model," he said. "It will be interesting
to see how that develops."

Bill Gates, who was such a champion of the channel model, is gone. Microsoft
is in transition. Will the company's new direction put it into more situations
in which it competes with -- or takes business away from -- its partners? Stay
tuned. For now, though, the haze is lifting, and partners don't necessarily
like what they see.

How concerned are you about Microsoft taking business away from you? Sound
off at lpender@rcpmag.com.

Microsoft is planning to activate "Insights for MyAnalytics" sometime late this month for most Office 365 users, but the ability of organizations to manage this feature won't be available until possibly mid-May.